Detailing The Future Projections Regarding The Supply And Demand For Condensate In Western Canada NGL Marketing & LNG Export Congress - Calgary Presented by John Homan Sr. Marketing and Logistics Representative
Forward-looking statements advisory 2 This (the Company ) presentation contains certain forward-looking statements. Forward-looking statements may include, but are not limited to, statements concerning estimates of exploitable original-bitumen-in-place, predicted recovery factors, steam-to-oil ratios and well production rates, estimated recoverable resources as defined below, expected regulatory filing, review and approval dates, construction and start-up timelines and schedules, company project potential production volumes as well as comparisons to other projects, statements relating to the continued overall advancement of the Company s projects, comparisons of recoverable resources to other oil sands projects, estimated relative supply costs, potential cost reductions, recovery and production increases resulting from the application of new technology and recovery schemes, estimates of carbon sequestration capacity, costs for carbon capture and sequestration and possible implementation schedule for carbon capture and sequestration processes or related emissions mitigation or reduction scheme and other statements which are not historical facts. You are cautioned not to place undue reliance on any forward-looking statements as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. By their nature forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties, both generally and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur. Although the Company believes that the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct and, accordingly that actual results will be consistent with the forward-looking statements. Some of the risks and other factors that could cause results to differ materially from those expressed in the forward-looking statements contained in this presentation include, but are not limited to geological conditions relating to the Company s properties, the impact of regulatory changes especially as such relate to royalties, taxation and environmental changes, the impact of technology on operations and processes and the performance of new technology expected to be applied or utilized by the Company; labour shortages; supply and demand metrics for oil and natural gas; the impact of pipeline capacity, upgrading capacity and refinery demand; general economic business and market conditions and such other risks and uncertainties described from time to time in the reports and filings made with security regulatory authorities, contained in other disclosure documents or otherwise provided by the Company. Furthermore the forward-looking statements contained in this presentation are made as of the date hereof. Unless required by law the Company does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements contained in this presentation are expressly qualified by this advisory and disclaimer.
Outline 3 North American condensate markets North vs. South Mirrored markets Examining the current supply of condensate to the oil sands industry that comes directly from Western Canada Western Canadian condensate supply Other sources of diluent Blending Determining the demand for condensate for diluent from the oil sands industry and what that means for condensate suppliers CAPP heavy supply forecast Rail DRU s Downside risk Highlighting the effects of the Cochin pipeline reversal on the demand and price of condensate in Alberta and BC Southern lights and rail US and global condensate supply sources Review and pricing outlook
N.A. Condensate vs. Sweet crude - mirrored markets 4 $120 $110 Western Canada C5+ MSW $100 $90 $80 $70 $130 $120 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Southern U.S. $110 $100 $90 $80 $70 Source: Bloomberg, NGX MTBLV Natural Gasoline LLS
Western Canadian condensate supply 5 Associated NGL production from natural gas drilling is the main source of condensate in Canada Condensate (C5+) production has been declining since 07/08 CAPP forecasts this decline to persist going forward Slowing natural gas drilling activity in the WCSB is the main contributor to the decline Recovering natural gas prices or increased liquids rich gas play activity are required to support higher production going forward Likely this outlook will be adjusted as tight oil and shale production increases in AB Source: CAPP June 2013 Production forecast Source: ARC Financial Corp.
Industry Optics suggest increasing production 6 Pembina s three integrated expansion components the twinning of the 200 MMcf/d Saturn deep cut facility ("Saturn II") to extract valuable NGL from raw gas streams in the Berland area of Alberta the twinning of the 73,000 bpd ethane-plus fractionator ("RFS II") at Redwater including preparations for RFS III as II is already fully subscribed the Phase II NGL pipeline capacity expansion of the Peace/Northern NGL System to accommodate increased NGL volumes Plains / Keyera Western Reach NGL system Production from the prolific Deep Basin area of northwest Alberta is expected to exceed take-away capacity Pipeline System will consist of two new-build pipelines with one dedicated to a mixture of propane, butane and condensate ( NGL mix ) and the other intended for segregated condensate service
Other sources of diluent in western Canada 7 Source: IHS CERA, COSA Condensate competes with many other sources of diluent for bitumen blending Potential diluent supply growth from returning natural gas production, tight oil growth and the North West Redwater Partnership Sturgeon refinery project north of Edmonton
Other sources of diluent in Western Canada 8 Source: IHS CERA, COSA Synthetic crude oil (SCO) is also used as a diluent providing another alternative supply source for condensate Requires economics to work at a 50/50 blend ratio compared to 30/70 condensate dilbit blend
CRW Density Kg/m3 MSW/C5+ Spread USD/bbl Blending light sweet into condensate 9 750 740 CRW Density MSW/C5+ Spread $30 $25 730 $20 720 $15 710 $10 700 $5 690 1-Jan-11 1-May-11 1-Sep-11 1-Jan-12 1-May-12 1-Sep-12 1-Jan-13 Source: Crudemonitor.ca, NGX Blending incentives can be as high as $25/bbl The market has and will continue to exploit this arb $0
Other sources of diluent in Western Canada 10 Sweet crude is another potential source of diluent New sources of light crude in Western Canada from tight oil plays are lighter then average Tight oil streams of ~790 specific gravity (SG) allow for blend ratios up to ~40% to maintain a <740 SG condensate stream This equates to a potential increase in condensate supply of 45-60k bpd based on forecasted CDN condensate supplies Potential growth in C5+ supply from shale and tight oil plays could increase blending opportunities further Source: Laricina Energy estimates
Western Canadian condensate demand 11 Source: IHS CERA, COSA In 2012, over 260,000 b/d of imported condensates, diluents from upgraders, as well as quantities of butane were needed to supplement the condensate supply from natural gas wells in western Canada
CAPP heavy oil supply forecast 12 Source: CAPP June 2013 Production forecast Condensate demand is calculated from an assumed 28% diluent blend requirement for oil sands production and 4% 22% blend requirement for conventional heavy production
Downside demand risk 13 Project slow downs and cancelations Poor market conditions Lack of financing and investment interest SOE investment restrictions Logistical constraints Pipeline capacity problems Rail Diluent Recovery Units (DRU) Technological advancement (field upgrading)
Downside demand risk markets 14 Canadian Energy Sector Equity Financings Source: Peters&Co. Note: Includes all equity and convertible debenture offerings for TSX/TSX-V listed and private companies in the energy sector announced in each respective year.
Downside demand risk markets 15 Would-be buyers and joint venture partners are sitting on the sidelines amid a combination of wildly volatile Canadian crude prices, pipeline infrastructure uncertainty, rising development costs ConocoPhillips Co., Koch Industries Inc. Royal Dutch Shell PLC, Marathon Oil Corp., Murphy Oil Corp. and Athabasca Oil Corp. had sought buyers/partners for oil sands projects, but assets were either pulled from the market or deals deferred/cancelled Ottawa restricted the ability of foreign state-owned enterprises to acquire oil sands assets in the wake of Chinese state-owned CNOOC Ltd. s $15.1-billion bid for Nexen Inc.
Downside demand risk Logistical constraints 16 Risk of delays or cancelation *Rail Pinch point approaching Source: CAPP June 2013 Production forecast
Downside demand risk - rail 17 Source: Peters and Co. Increased rail take-away capacity relieving pressure on CDN pipelines Rail requires approx. 6% to 12% less condensate then shipping heavy crude via pipe
Downside demand risk diluent recovery units (DRU) 18 The DRU catch 22: Source: Laricina Energy estimates Economics could be challenged as DRU s likely only provide required return rates in high condensate price environments DRU s have the potential to significantly cut condensate demand which would reduce prices and limit the economics
Downside demand risk technology (field upgrading) 19
Higher supply lower demand scenario 20 Source: IHS CERA, Laricina Energy estimates Increased supply from sweet blending optimization, increased tight oil condensate production Decreased demand from lower railbit requirements / DRU s / field upgrade Leads to a potential 100k to 150k bpd decline in required imports
Southern Lights 21 Ships condensate to Canada from St. James via the Capline pipeline to Chicago from where it is shipped on the Enbridge Southern Lights pipeline to Edmonton, AB Current capacity is 180,000 bpd
Cochin pipeline reversal 22 Source: kindermorgan.com Will move light condensate (~95k bpd) from Kankakee County, Ill., to existing terminal facilities near Fort Saskatchewan, Alberta Received more than 100,000 barrels per day of binding commitments for a minimum 10-year term 85,000 BPD is reserved for committed shippers and 10,000 bpd for uncommitted
Condensate import comparison 23 Transportation cost approx. $/bbl Cochin Southern Lights Rail ~commited $ 4.95 $ 7.00 $ 14.00 ~uncommited $ 7.50 $ 14.00 Long term full pipe ~commited $ 3.00 ~uncommited $ 6.00 Source: IHS CERA. Laricina Energy estimates (Thousands of barrles per day) 2013 2014 2015 2016 2017 2018 2019 2020 Condensate Imports Required to Meet Demand 239 299 353 395 433 463 500 504 US Rail (PADD 2,3,4) 59 59 0 25 8 38 75 79 PADD 2/3 Southern Lights (180kb/d - 330 kb/d) 180 180 258 275 330 330 330 330 PADD 3 Explorer/Cochin Pipeline (60-95 kb/d) in service Jul'14 60 95 95 95 95 95 95 Total imports from rail and pipe: 239 299 353 395 433 463 500 504 Marginal supply market sets price Marginal condensate barrel to Western Canada will be from uncommitted shippers on Southern Lights through 2016 As volumes increase tolls should decrease for uncommitted shippers from ~$14 to ~$6 Rail economics will again set the price for the marginal barrel 2016/2017 forward until a new pipe is built (Gateway?) If required condensate imports decline to levels shown previously in the higher supply lower demand scenario, excess supply on rail could force the marginal price $8 - $11 below pipeline implied parity levels to clear the USGC market (Just like WCS now)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Global Condensate sources to N.A. market 24 300.00 North America Segregated Condensate Imports - Thousand bpd 250.00 200.00 150.00 100.00 50.00 0.00 Why the decline? Algeria Nigeria CIS Region Europe Other Africa Latin America UAE Indonesia Other Asia Malaysia Singapore Qatar Saudi Arabia Australia Source: IHS CERA Exploding light oil and NGL production in the US over the past three years is expected to push all foreign imports out of the North American market by 2014
US condensate supply 25 The EIA estimates about 11 percent of US crude production in 2010 was condensate. That percentage could increase in 2013 to about 14 percent of production or close to 1 MMb/d Although rapidly increasing volumes from the Bakken are adding to condensate supply the main source of new supply is coming from the Eagle Ford in West Texas Producers are increasing production twice as fast as thought likely in 2011 Over 40% of Eagle Ford production is reported as condensate >45 API Source: rbnenergy.com
US condensate supply 26 Supply underestimation (February 2013) EOG Resources told analysts that most Eagle Ford oil production should be classified as condensate rather than crude oil They backed up their assertion with a chart of production quantity and API quality (originating from a survey carried out by IHS) indicating 70 percent of production is condensate Current forecasts indicate that translates to condensate production of over 500Mb/d in South Texas during 2013 Source: IHS, EOG Resources, rbnenergy.com
US condensate supply 27 Why misreport crude vs condensate production? The posted price for 60 API Eagle Ford condensate averaged $17.5/bbl below 40 API crude during 2012
US condensate supply 28 Permian Basin production is also adding to supply along with other plays like the Utica in the Michigan Basin and the Anadarko and Fort Worth Basins The production of natural gas liquids (NGLs) increased twice as quickly as expected just two years ago in 2011 Current production of 3.2 MMb/d (gas plants + refineries) was only supposed to be achieved in 2016 and now the forecast is for 4 MMb/d The result has been more rapid implementation of infrastructure to handle NGLs and that supply has exceeded demand so that exports are required
USGC Refinery supply/demand shift 29 USGC refineries are being inundated with light sweet crude and condensate Diluent in CDN dilbit further aggravates the oversupply in the region Natural gasoline will need to be backed out of the blend pool EPA Tier 3 Sulfur regulations will further aggravate the issue Source: RBN Energy 2013
Condensate/Naphtha export markets 30 Latin America (Columbia/Venezuela) Highest potential as an alternative buyer of excess naphtha for use as a diluent but under current law, exports of condensate requires special permits not easily obtained Venezuelan forecasted production 2015 New Extra heavy production increasing by >1 MM bpd Source: IHS CERA
Competing global supplies 31 Australia Segregated Condensate Exports to World by Subregion - Thousand bd 2015 Source: IHS CERA
Review 32 Declining condensate production is expected to continue as natural gas drilling declines in the WCSB New tight oil and shale gas plays in Western Canada could begin to off-set the decline and potentially, if not likely, begin to increase y-o-y production Current estimates forecast 2013 2020 Western Canadian condensate demand to increase by ~350k bpd requiring an ~250k bpd increase in imports Downside risk to demand is high due to current financing market conditions, logistical issues as well as technological innovations Import needs will be met by Southern Lights, rail and the Cochin reversal in 2014 Exploding tight oil and shale gas plays in the US are beginning to flood the Southern US with NGLs and super light oil at levels that are still unclear but considerably above forecasted demand in North America US law prohibits export of condensate without special permits but exports of Naphtha are permitted
Pricing outlook 33 $US/bbl Source: Laricina Energy estimates Bearish US condensate pricing outlook due to oversupply, restricted export ability and downside demand risk from the oilsands Increasing diluent pipeline utilization should lower pipeline tolls going forward Depending on supply/demand balance moving back to rail as the marginal import method to Canada around 2017 could increase condensate prices in Edmonton from higher transport costs but more likely Edmonton will become the price setting market as excess supply moves North to clear the US markets Like the rest of the NGL market, condensate producers should examine supply deals with oil sands producers to ensure a home for their product in the long term
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